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This Is How Credit Card Processing Works

Some online store owners think that they don’t need to understand credit card processing. As long as transactions are running smoothly, there’s no need to give yourself a headache with the details, right? You may be ok with that until you get a chargeback, then you’re going to reconsider your whole method. You’re going to start asking all types of questions, trying to find a quick fix to your problem. Why put yourself through all that when you can avoid it? If you want my advice, I would recommend asking the questions in advance. You may not have all the answers you’re looking for when you start your online business. But at least you’ll have some; the rest will follow later on. It’s actually not that hard; let’s break it down for you.

Credit Card Processing Key Players

– Cardholder: The person making the online transaction using his credit card which he obtained from an issuing bank to purchase items from a merchant.

– Merchant: The store selling its products online and accepting credit cards or debit cards as payments from cardholders.

– Acquiring bank: A registered member of the card associations (Visa and MasterCard) which creates and maintains merchant accounts allowing them to accept credit and debit cards. Acquiring banks provide merchants with equipment and software to accept cards and other necessary aspects involved in card acceptance. They receive the payment authorization requests from the merchant and send them to the issuing bank for approval then deposit funds from credit card sales into a merchant’s account.

– Payment gateway: Provides a service or device allowing merchants to accept credit cards online.

– Credit Card Network: Operates the networks that process credit card payments worldwide.

– Issuing Bank: A registered member of the card associations (Visa and MasterCard). It’s also the financial institution that issued the credit card involved in the transaction, it holds the right to approve or deny it. After authorizing the transaction, the issuing bank pays the acquiring bank for purchases made by the cardholder.

– Card Associations (Visa and MasterCard): They govern the members of their associations, and maintain the card networks and their brand.

Credit Card Processing Steps

Step 1:

The cardholder initiates the payment by selecting the items he’d like to purchase. He selects his payment method and then enters his billing information, name, address, etc.

Step 2:

In this step, the payment gateway sends the transaction details to the payment processor.

Step 3:

Here, the payment processor validates the payment details by sending them to the credit card network. The network then forwards those details to the card issuing bank for authorization.

Step 4:

The credit card issuing bank either approves or denies the transaction based on whether the transaction is within the cardholder’s credit limit or not. The authorization request includes the following: Credit card number, expiration date, billing address, card security code, and payment amount.

Step 5:

If the payment is approved, the card issuer will charge the user and forward the funds to the credit card network. The card network then rotates the transaction approved status back to the payment processor, who notifies the payment gateway and sends on the fees.

Step 6:

The payment gateway informs the user that the transaction was approved through the online store.

Step 7:

At this point, the issuing bank transfers the required funds to the merchant’s account. Then the cardholder repays the issuing bank under the terms of their agreement. Funds are usually received within 1-2 business days. A receipt is then emailed to the user and payment receipt notifications go to the merchant.

What happens when the credit card is declined?

If the payment was denied by the issuing bank, then the payment gateway notifies the website and the process fails to proceed. Reasons for denying a payment include insufficient funds, incorrect credit card number, expiration of the card, technical issues, possibility of fraud, etc…

This is as simple as credit card processing works. If you still have some questions in your mind, all you have to do is to read more about the topic. And every time you do, you’ll find yourself more and more familiar with it. To learn more about payment gateways and how they work, read this blog post: 19 Answers to The Most Frequently Asked Questions About Payment Gateways.

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